Advice Required - Full Financial Situation Given

Discussion in 'Investment Strategy' started by John Deakins, 15th Sep, 2018.

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  1. John Deakins

    John Deakins Member

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    Hello Property Moguls,

    Here is my financial situation.
    32 years old single male.
    Total net worth invested in a mixture of asset classes (Global Index Funds, shares, small amount of cryptocurrency): $195,000 AUD (this does not include Super or overseas pensions)
    Office Job salary: $82,500 P.A Potentially a bonus of 10%
    HECS Debt: Approx: $46,200
    No other debt.
    I currently rent in shared accommodation and pay $280 per week.
    Live in Sydney inner West and work in Sydney CBD.

    How I accrued $195k. I invested in index funds and made approx 10% P.a. that was continuously compounded. I never borrowed to invest. I also made quite a bit of money from bitcoin (a bit of luck). Only 5% of my portfolio is currently in bitcoin so it's not significant.

    I totally need to rethink my long term financial situation. If I just leave my assets in equities, I stand to make at most $20,000 per annum in investments with obvious downside risks. I want to make my money work harder and reach financial freedom faster, whilst minimising risk.

    There are conflicting views on property at this stage in the cycle. Some people I speak to say investing in property is a terrible idea at the present time due to overvaluation and the debt fuelled bubble inflated by rich Chinese investors. But the way I see it, there are risks everywhere; in property, equities etc. What's the alternative? Stay in cash and earn zero interest and risk inflation taking off? There are opportunity costs everywhere.

    I like the idea of getting into debt in a positively geared investment and I think returns from property will outperform equities only because of the access to debt which leverages returns. I think I have to take a risk in this area, despite me being rather risk averse by nature.

    I think my best approach is to look to buy a 2 apartment in Sydney (for around $500-600k) to live in, using the entire $200k as a deposit, then rent out the other room for extra income. Then as my equity grows potentially buy an IP, or use the collateral to diversify into equities while keeping a loan to value on the initial property I'm comfortable with. However also considering being a rentvester if there are higher growth opportunities outside of Sydney. I don't mind renting in Sydney if I think that's more intelligent financial. My main goal is about what is the best financial decision for me to increase wealth.

    Main reason I like the idea of buying property is I can use it as collateral to get a proper loan (flexibility) rather than my current shares where I can only get a margin loan (and risk a margin call) whilst interest rates are much higher (worse situation).

    I guess I'm still thinking of what to do in my situation. If you were in my situation what would you suggest I do?
     
  2. Hodor

    Hodor Well-Known Member

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    What are you saving each month? Rent is ~$1200 a month which might change if you get a place to live in. What you are actually saving each month will have a large effect on what you can do.
     
  3. The Y-man

    The Y-man Moderator Staff Member

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    Well done on getting where you are.

    10%pa YOY is a pretty hot return rate - will a +ve CF resi IP will do much better? I am not so sure.


    The Y-man
     
  4. The Y-man

    The Y-man Moderator Staff Member

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    Agree. "Full financial situation" is NOT given :)

    Need to know living costs - absolutely critical.

    The Y-man
     
  5. John Deakins

    John Deakins Member

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    Outside of dividends which I have been reinvesting (so I don't include these as 'savings' at current), if you look at only what I'm earning in my office job versus my expenses, I'm currently saving anywhere from $1500 to $2000 per month, probably on average $1750 per month over last 6 months.
    Idea of buying an apartment to live in is appealing because I can rent out the other room and earn income that way.
    What other options do I have? What value property should I buy if at all? Or should I just keep doing what I'm doing and not move into property at all?
     
  6. John Deakins

    John Deakins Member

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    I think it might due to the effect of leverage? The 10% YOY is unleveraged returns. If investment property is making 10% PA (capital growth plus rental yield) then surely the deposit will outperform an unleveraged 10%PA invested in equities... I guess this is the main thing that is luring be to property investment..
     
  7. John Deakins

    John Deakins Member

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    I'd like to simplify my question to this:
    Wealth: $195,000 can be converted into cash at any moment
    Income: $82,500
    Monthly savings: $1700
    Based on those numbers, what strategies are possible and provide greatest opportunity for future wealth creation with medium to low risk:
    A) Buy PPOR and rent out second room in Sydney by selling my $200k equity investments. Invest future funds in either an IP or diversified equities.
    B) Be a rentvester, buy an IP outside of Sydney for $300 by withdrawing $50k as a margin loan using my $200k investments as collateral that I don't sell. As my wealth grows, buy a PPOR later, maybe in 5 years time.
    C) Just continue accruing wealth as I've done by reinvesting savings
    D) Other (e.g. converting to cash, buying gold, starting a business or anything else, want to hear ideas)
     
  8. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    If you converted the $195k into cash what would be the CGT be like?
     
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  9. John Deakins

    John Deakins Member

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    CGT not a big issue, around 5k to convert whole lot into cash right now. Low due to gains already been realised in previous tax years, some assets in UK ISA while I was living there in a tax free wrapper. Probably $190k then after CGT tax taken into account.
     
  10. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    how much would a main residence be?
     
  11. John Deakins

    John Deakins Member

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    If I went with Option A I was thinking to be looking for a 2 bedroom apartment unit for approx $600k, so I'd have to get a loan of approx $410k . Although this is flexible, and the purpose of this post is to ask for people's opinions, based on my financials about what I probably SHOULD do. E.g. if I went with Option A, would it make sense to buy an even more expensive unit (e.g. 700k) which I think I would still be able to afford?
     
  12. Stoffo

    Stoffo Well-Known Member

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    Have you considered continuing to rent/share and buying a cheaper property interstate ?

    That way you would get to keep a large chunk of your current portfolio whilst dipping your toe into property, resulting in a diversity of investments ( and some possible negative gearing)

    Note, if cash flow positive properties were easy to find that would mean 85% of us are doing it all wrong :oops:
     
  13. Hodor

    Hodor Well-Known Member

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    It's pretty hard to beat a successful strategy involving leverage. If you happen to buy into a flat property market for a decade where does that leave you? After expenses I'm guessing behind.

    Margin loans except at extremely low leverages aren't viable IMO. If you went even half the leverage most do on property you'll likely be wiped out.

    There are any number of possible choices, what does the risk and reward of each do for you?

    Debt recycling using shares if you buy a PPoR might interest you given what you have done.

    Knowing your long term goals might help some brighter minds give you better ideas.

    BTW, well done on what you have achieved so far.
     
  14. John_BridgeToBricks

    John_BridgeToBricks Buyer's Agent Business Member

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    Hi John,

    I echo what others have said - well done overall, and for picking cryptos in particular.

    I am a bit old school, but here goes. At 32, I think you are at the stage of life where you need to be simultaneously setting up your lifestyle infrastructure, and building wealth at the same time.

    So I think you should buy your future family home in a location that you want to live in, even if you rent it out in the short term. It is sort of the opposite of rentvesting, (where you buy in an area you don't want to live in) - at 32 you do need to be thinking about engineering your lifestyle, and also sort of what kind of image you want to project of yourself. I know it sounds fuddy duddy, but I think it's helpful advice.

    Lastly, my personal view is also that people should be slowly accumulating and holding gold/silver - not as an investment, but as a vehicle for savings and as a debt (and currency) hedge. We live in interesting times, and physical assets both fixed and portable are have enduring wealth qualities - topic for another thread perhaps.
     
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  15. mikey7

    mikey7 Well-Known Member

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    How much is a 3 bedroom in the areas you're looking at? Rent out 2 rooms.. might make more?
     
  16. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    I won't suggest would you should do, but you could

    Buy a main residence, using an 80% loan
    Debt recycle this down and borrow to buy other investments
    and possibly use the 6 year rule to rent the property out for a while

    The goal could be to get a CGT free asset, which you could leverage off into other assets.
     
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  17. John Deakins

    John Deakins Member

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    Cheers for the responses everyone.
    I'm definitely torn between Option A and Option B.
    Option A: PPOR in Sydney with rooms rented out. This would have non financial benefits of me actually having my own place. I.e. can begin to set up my personal lifestyle, able to get a dog or a cat, don't have to deal with landlords etc. It's a big plus, so I am leaning on this option. It seems potentially I can be looking at properties over 600k? I haven't really crunched the numbers but with a 80% loan I could potentially get a $1m PPOR but I don't know how intelligent that would be from a risk perspective (e.g. with a 20% housing crash I'm wiped out).
    Option B: Stoffo, for a long time I really agreed with you but now leaning towards Option A. I really like investing and self manage my own equity portfolio, and to do Option A I have to sell my entire equity portfolio. I'd previously thought I'd really like to keep the 195k portfolio whilst getting a small margin loan of say, $50k (so LVR 0.25 which is pretty conservative), which would allow be to buy an IP somewhere in say, Brisbane for $300k, then I'd have a total portfolio of $500k. I still haven't said no to Option B. I have to consider pros and cons of both for now..
     
  18. John Deakins

    John Deakins Member

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    Yes, I am really thinking of doing this but surely 80% loan is too high?. I was thinking max 650k property, so with 190k deposit that's a 70% loan.. or am I being too conservative?
     
  19. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    What be your risk profile ?

    ta
    rolf
     
  20. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    even 90 % lvr with some cash buffer held back is much safer than 80 % lvr with 20 bucks buffer...................

    Our society evaluates REAL risk quite poorly

    ta

    rolf
     
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